Understanding the new standalone moratorium for insolvent companies

Find out how a standalone moratorium could help your insolvent business 

A crucial aspect of the Corporate Insolvency and Governance Act 2020 was the implementation of a procedure providing companies facing financial distress with a respite from their creditors. Known as the standalone moratorium, this measure grants viable yet struggling businesses the time and space needed for directors to devise a recovery plan.

The initial moratorium spans 20 business days, with the option for an extension if necessary. This period allows directors to thoroughly assess their options and create a turnaround plan without the concern of legal action from creditors.

The purpose of the moratorium is to afford company directors the time to contemplate strategies for the company’s recovery without incurring additional costs. An insolvency practitioner oversees the process, ensuring that the moratorium is likely to result in the business’s rescue as a going concern.

 

What is the moratorium process?

The standalone moratorium is a director-led process aimed at assisting insolvent or financially distressed companies. To initiate the process, company directors must file relevant court papers stating the company’s inability or imminent inability to pay its debts. These documents, accompanied by statements from an insolvency practitioner acting as the ‘monitor,’ affirm the company’s eligibility for the moratorium and the likelihood of it leading to the business’s rescue as a going concern.

If the court grants the moratorium, directors are allotted an initial 20 business days to evaluate their rescue and recovery options. They can apply for a 20 business-day extension if needed, with a longer extension possible under specific circumstances upon approval by the court or the company’s creditors. In practice, many standalone moratoriums extend to at least 40 business days.

Once the moratorium commences, directors must inform the monitor, who, in turn, notifies all of the company’s creditors and the Registrar at Companies House. Consequently, it becomes public knowledge that the company has entered the moratorium process.

Throughout the moratorium, the company continues to operate under the directors’ control, though with certain restrictions on credit access and asset disposal. The appointed monitor oversees the moratorium, ensuring a viable plan is in place to rescue the company as a going concern. Creditors are barred from taking legal action against the company, but directors retain the ability to subject the company to an insolvent process, including voluntary liquidation.

 

What businesses are eligible?

In general, businesses are qualified to apply for a standalone moratorium if:

• They are limited companies incorporated under the Companies Act 2006; and
• The directors declare that the company is unable or likely to become unable to pay its debts; and
• The monitor believes that a moratorium would lead to the rescue of the company as a going concern; and
• The company is not currently undergoing an insolvency procedure and has not been in a moratorium, Company Voluntary Arrangement (CVA), or administration in the past 12 months.

The stipulation that the moratorium must result in the rescue of the company as a going concern implies that the process cannot be employed to stabilise the business before its sale. Additionally, the moratorium is unsuitable for businesses lacking future viability; it cannot be utilised to merely postpone the liquidation process.

 

What debts do you have to pay during the moratorium?

The moratorium offers the business a reprieve from debts incurred before the moratorium, offering a much-needed breathing space. 

However, certain business overheads still require payment during the moratorium, including:

• Goods and services supplied during the moratorium
• Staff wages and salaries
• Redundancy payments
• Rent 
• Loan payments that become due 

 

What legal action does a moratorium protect you against?

One of the primary challenges for a company grappling with debt is the persistent pressure from creditors and the looming threat of legal action. The moratorium shields the business by prohibiting creditors from pursuing legal measures, affording you the necessary time and space to devise a plan. 

The moratorium safeguards you against:

• The repossession of goods by secured creditors
• A landlord exercising their right to forfeit a lease agreement
• The initiation or continuation of any legal proceedings by a creditor
• The commencement of insolvency proceedings, including the submission of a winding-up petition against the company
• The holder of a floating charge on company property issuing notice to crystallise the floating charge or restrict the disposal of property

 

What restrictions apply to the company during the moratorium?

In addition to the various protections, a moratorium imposes several restrictions on your company. For instance, you won’t be able to access new credit agreements exceeding £500 unless you notify the creditor about the company’s moratorium status. Additionally, you cannot provide security without the consent of the monitor or dispose of assets unless the disposal is part of the regular course of business.

 

How does the moratorium end?

A standalone moratorium can be concluded through various means. The moratorium terminates upon the implementation of plans to recover the company. If not extended, it also concludes after the initial 20-business day period, irrespective of the existence of recovery plans.

Additionally, the monitor possesses the authority to terminate the moratorium if it is no longer deemed likely to lead to the company’s recovery, if you neglect to furnish the requested information, or if payments not covered by the payment holiday are not made promptly. 

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• How to handle soaring overhead costs
• Common Reasons Why Small Business Startups Face a High Risk of Failure
• How to take money out of a limited company

Do you need time to rescue your business?

If your business is facing challenges and you need time to explore your options, a standalone moratorium could provide the breathing space to get back on track. Schedule a free consultation to discuss your possibilities with one of our nationwide insolvency practitioners.